BANKING & FINANCE LITIGATION UPDATE

ISSUE 65

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DOMESTIC BANKING CO-OPERATIVE BANK BANK OF ENGLAND 7. The Co-op has hired Morgan Stanley to sell or run off its loan book in an attempt to raise more capital 1. Interest rates have been left at 0.5 per cent amidst to meet a target, imposed by the Bank of England, indications that Britain's manufacturing sector is of holding 7 per cent Basel III Tier 1 capital. The improving and the economy growing. Co-op said in January that it held 6.7 per cent making it the only institution to fall below the Times, 10 May 2013 regulatory minimum. 2. Mark Carney, the new governor-designate of the Times, 14 May 2013 Bank of England, has said in a speech that he advocates "forward guidance" in relation to 8. The Co-op's takeover of Britannia Building monetary policy and that borrowing rates will Society four years ago was meant to produce a continue to be held at very low levels until the "super-mutual" but the deal is threatening to end economy recovers. the idea of the Co-op being a major force in British banking. The recent downgrading by Moody's and Financial Times, 2 May 2013 the departure of chief executive Barry Tootel 3. The Bank of England's Funding for Lending following the failure of the deal to take over 632 Scheme has been given another year to increase Lloyds branches can be linked back to the 2009 lending to small and medium sized enterprises merger with the Britannia. (SMEs). The Scheme, which will now continue Daily Telegraph, 13 May 2013 until the end of 2014, will offer SMEs less expensive funding rates from the Bank of England 9. The Co-operative Bank has submitted a rescue than they would normally get from banks and will plan to the Bank of England that will force the possibly be extended to include finance houses as lender to sell parts of its business to plug a £750m well as banks. black hole in its finances. The bank submitted a capital plan to the Bank of England after results Financial Times, 24 April 2013 had showed huge losses on commercial property loans. Senior City bankers said that there was no imminent danger of a collapse but the bank's 4. Barclays Wealth is introducing voice recognition capital levels were below the regulatory minimum. technology to replace pin numbers and security questions. The bank asserts that the technology Sunday Times, 12 May 2013 will be able to ascertain the validity of a customer within 30 seconds of a conversation taking place. HSBC 10. HSBC has released its latest quarterly figures, Telegraph.co.uk, 8 May 2013 recording its best performance in a quarter since it 5. Guardian Care Homes' case against Barclays in started publishing quarter-by-quarter results. The relation to allegations that the bank mis-sold swaps bank saw a near doubling of its pre-tax profits for will not be heard until next year, after Barclays the first three months of 2013 to £5.4 billion, with won permission to appeal to some aspects of the a year-on-year increase of 95 per cent in pre-tax case. A provisional trial date has been set for 29 profits. The increase was driven by a $1 billion April 2014. reduction in costs, a fall in bad debt charges and lower provisions for mis-selling claims. Guardian, 30 April 2013 Telegraph, 8 May 2013 6. Barclays Bank's first quarter profits have fallen by a quarter from the same time in 2012 to £1.78 billion. The reduction in profits was partly put 11. The price of shares in Lloyds Banking Group has down to the costs of "Project Transform" - the almost reached the minimum "break-even" level bank's scheme to restructure and reform itself, set by the government suggesting that the sale of announced in February - which are said to be £500 the government's 39 per cent share in the bank million, as well as to losses stemming from the could begin within the next few months. The reduction of its European retail arm. minimum sale price is 61.2p - shares have risen to

Telegraph, 25 April 2013

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60.4p, the first time they have been above 60p in 17. Lloyds has issued 713 million new shares worth more than 12 months. £350 million as it continues its attempt to improve its balance sheet. The shares are being swapped Telegraph, 17 May 2013 for hybrid capital securities held by institutional investors and will increase Lloyds' share capital by 12. The chairman of Lloyds Banking Group, Win just over 1 per cent. Bischoff, has announced that he will leave the bank before the company's next annual general Independent, 23 April 2013 meeting in 2014, after 5 years in the role. He said that Lloyds was "ahead of the plan" in many areas THE ROYAL and that it is a good time for the bank to start 18. A share sale by the Government could start in 2014 looking for his successor. the chairman of RBS predicted as he stated that the turnaround of the lender was "substantially Guardian.co.uk, 13 May 2013 complete". Sir Philip Hampton's comments came 13. Lloyds Banking Group made its final repayment of as RBS reported a £826 million pre-tax profit for £3.5 billion to the European Central Bank (ECB) the first quarter of 2013. for the £13.5 billion loan granted to it by the ECB as part of a bail-out package in 2009. The final Daily Telegraph, 4 May 2013 instalment of the repayment came two years ahead 19. RBS is looking at up to six bids for the 315 of schedule and signalled the growing strength of branches it needs to sell as part of EU state aid the bank's balance sheet. rules following the collapse of its deal to sell them to Santander in autumn 2012. A decision on the Independent, 11 May 2013 final bidder to go through to due diligence is 14. Lloyds Banking Group's first quarter figures for expected to be made very shortly, and looks to be a 2013 rose dramatically from £280 million during choice between two consortiums - the first made the same period last year to £2 billion. The bank's up of approximately 20 asset management pre-tax profits were boosted by £800 million made companies and the second consisting of US private on the sale of gilts and were higher than analysts equity groups and a variety of British investment had predicted. companies. The new business will be rebranded as "Williams & Glyn's", the name of one of the Telegraph, 1 May 2013 previous incarnations of RBS.

15. Banco Sabadell, Spain's fifth largest bank, has Financial Times, 2 May 2013 agreed to buy Lloyds Banking Group's retail and private banking business in Spain in a deal worth 20. RBS will seek permission from its investors to sell up to €100 million. Lloyds will get €20 million in new "loss-absorbing capital instruments" in cash over the next five years, plus €84 million accordance with the push by regulators to make worth of shares in the Spanish bank. Lloyds said sure adequate buffers are in place in the country's that the deal was part of its strategy to concentrate biggest banks to withstand any new losses. RBS on business in the UK. will ask shareholders for the go ahead to issue new shares which, based on its current share price, Telegraph.co.uk, 29 April 2013 could allow it to raise in the region of £4.5bn through the sale of bonds that convert into the 16. Lloyds Banking Group will need to find another bank's own equity. buyer for the 632 branches it had hoped to sell to the Co-operative Bank after the Co-op withdrew Telegraph, 27 April 2013 from the year-long talks over the sale. The European Commission is forcing Lloyds to sell the 21. The Financial Conduct Authority (FCA) has branches by November 2013. The bank's chief written to the Court of Appeal to ask to be allowed executive, Antonio Horta-Osorio, said Lloyds to take part in a case involving allegations of the would "proceed with the option to IPO the mis-selling of interest rate swaps by the RBS. The business". High Court case was won by the bank and is being appealed by the claimants Paul Rowley and John Guardian.co.uk, 24 April 2013 Green. The FCA is understood to want to participate to outline and clarify its rules relating to interest rate swaps. Financial Times, 24 April 2013

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STANDARD CHARTERED 26. EU member states are moving towards the last stages of talks on national rules to wind up banks 22. recorded a 5 per cent fall in profits in the first quarter of 2013. The bank does that fall into trouble, and with Britain isolated in its not release detailed figures in its interim accounts opposition to the establishment of a mandatory, pre -financed national fund to pay for bank resolution but the bank's finance director, Richard Meddings, costs, the chancellor could be forced to put up to is confident that the bank will have another very £9 billion to one side for a standalone crisis fund successful year with a further rise in profits. for banks. The most recent compromise, would Times, 9 May 2013 involve getting the industry to pay for a resolution and deposit insurance fund equalling at least 1 per 23. Temasek, a Singaporean sovereign wealth fund cent of covered deposits. and the largest shareholder of Standard Chartered, abstained from backing the re-election of four Financial Times, 1 May 2013 executive directors to the board at the lender's annual general meeting. Temasek has called for 27. The FCA has given the country's largest banks more non-executives to be appointed to Standard permission to begin the process of contacting customers and paying the estimated £2 billion plus Chartered's board and for the number of current of compensation owed to small firms who were managers serving as directors to be reduced. The mis-sold derivatives products. bank has refrained from doing so. Sunday Telegraph, 28 April 2013 Telegraph, 9 May 2013 28. Members of the parliamentary banking DOMESTIC GENERAL commission are considering a law under which jail terms could be handed to bankers who have 24. Civil servants from HMRC, Serious Organised behaved recklessly. A number of those on the Crime Agency, Home Office and GCHQ have held commission have argued for a law that would hold a conference to discuss the security threats and bankers liable for any catastrophic losses resulting taxation issues that would need to be addressed if from their actions. Chancellor George Osborne, the UK were to widely adopt Britcoin, the who set up the commission under pressure from unregulated electronic cash system. Labour in the wake of the Libor scandal, will find it hard to reject the recommendations of the group, Financial Times, 14 May 2013 which is due to issue its final report in May.

25. Two of the three current accounts that will be Financial Times, 26 April 2013 launched later in 2013 by the Post Office will charge a fee. A monthly fee of £8 and £5 respectively will be charged for the Packaged EUROPEAN BANKING Account and the Control Account. The accounts will first be available via 29 East Anglia branches before being rolled out across the Post Office's 29. Lawyers for the Bank of Ireland borrowers who 11,500 branch network in 2014. have had a rate rise imposed on their tracker mortgages are preparing a complaint under the Financial Times, 13 May 2013 Unfair Terms in Consumer Contracts Regulations 1999 which they will submit to the Office of Fair 26. With regulators having enlisted Bank of England Trading. financial stability experts to assist them in coming up with "doomsday scenarios" UK banks are now Sunday Times, 5 May 2013 closer to facing publishable stress tests that could impact both bonus and dividend payments. The 30. Interest rates for over 13,000 borrowers with Bank of England and the Prudential Regulation tracker mortgages with the Bank of Ireland will Authority (PRA) were told in April by the UK's double from the 1 May. This follows an Financial Policy Committee to "develop proposals announcement by the bank in February that it for regular stress testing of the UK banking planned to increase its tracker rates even though system" beginning in 2014. The chief executive of the Bank of England base rate remains at 0.5 per the PRA, Andrew Bailey, has said that his team cent. The move is expected to hit buy-to-let lacks the resources to do anything comparable to landlords in the main who make up two thirds of the US Federal Reserve's annual public exercise. those affected.

Financial Times, 2 May 2013 Telegraph, 1 May 2013

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BNP PARIBAS 35. Deutsche Bank is to expand on its small investment banking presence in Birmingham by 31. After net income fell 45 per cent in the first quarter of 2013, BNP Paribas has vowed to continue setting up a trading floor which will double the reducing costs and personnel. Analysts had feared size of its Brindleyplace office. Most of the bank's 1000 or so employees in the city are involved in the decline in profits would be worse. A plan by the bank to save €2 billion a year by 2015 is in its back-office processing roles. initial stages. Financial Times, 29 April 2013

Times, 4 May 2013 36. One of the largest legal battles to come before the High Court in London has begun between COMMERZBANK billionaire investor Alexander Vik and Deutsche 32. Commerzbank's long-running legal battle with Bank. The bank is suing Sebastian Holdings (SHI) more than 100 bankers based in London over to try and recoup £250 million it claims is unpaid €52m (£44m) in unpaid bonuses has come to an for the foreign exchange prime broker services it end. The bank will not take the case to the provided to the offshore company controlled by Mr Supreme Court following a Court of Appeal ruling Vik. SHI is countersuing Deutsche Bank for $8 in April that it must pay the money to the bankers. billion in damages in New York. Hundreds of millions of euros were pledged to employees at Dresdner Kleinwort just months Financial Times, 23 April 2013 before its parent was taken over by Commerzbank at the peak of the financial crisis in 2008. EUROPEAN CENTRAL BANK Commerzbank argued that it did not have to pay 37. Despite moving to cut its main interest rate by a the cash following a multi-billion euro loss after quarter point to 0.5 per cent, the constraints on acquiring Dresdner. A High Court ruling however further action by the European Central Bank said the bank had a legal obligation to pay the (ECB) have been highlighted by the opposition to bonuses. the decision by a German official in the inner sanctum of the bank. The ECB president, Mario Telegraph, 4 May 2013 Draghi, said that the bank remained "ready to act if needed" and that he had an "open mind" over the CREDIT SUISSE imposition of negative interest rates. Previously Mr 33. Credit Suisse is involved in a $500 million court Draghi has expressed caution about such a move case, facing claims by two offshore companies and the unforeseen consequences it could have. owned by Georgian businessman Zaur Leshkasheli for its part in the sale of his stake in the Kurovdag Financial Times, 3 May 2013 oilfield in Azerbaijan in 2008 to Berghoff Trading. The two companies are suing the Swiss bank SANTANDER arguing that it did not act in their best interest 38. Santander and three private equity firms apparently during the $245 million sale, and claiming that plan to list the Spanish banking group's US they should have received at least $450 million automotive finance unit in the forthcoming months more for the sale. They allege that Credit Suisse in a deal which could put the company's financial failed to take note of interest from other potential worth at between $7bn and $9bn. purchasers. Times, 29 April 2013 Financial Times, 8 May 2013

DEUTSCHE BANK 39. Profits at Santander were down in the first quarter of 2013, falling 26 per cent across the group from 34. Deutsche Bank has revealed plans for a share issue the same time last year. However, pre-tax profits aimed at raising €2.8 billion to temper concerns for the UK arm of the Spanish bank fell by just 22 amongst investors regarding the bank's balance per cent form £363 million to £282 million. The sheet. 90 million shares - just under 10 per cent of UK bank's chief executive, Ana Botin, said that its equity base - will be placed with institutions. she expected to see greater stability in the bank's The news came after the bank revealed better than operating environment in the year ahead and that expected first-quarter results, with net income up the bank assigned the drop in profits to higher 18 per cent year on year at €1.7 billion from €9.4 interest rates on saving which were in operation in billion of revenues. 2012 to attract investors.

Financial Times, 30 April 2013 Times, 26 April 2013

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40. Santander UK has reduced gross mortgage lending capital in June which will enable the banks to keep by 41 per cent to £3.3 billion in the first quarter of their autonomy whilst they search for overseas 2013 compared to the year before. The decline investors, in line with international creditors' reflects a decision in the last six months by bailout terms. The three banks will be able to Santander to curtail risky interest-only mortgages. regain access to interbank markets, complete agreed mergers with smaller Athens lenders and Thetimes.co.uk, 25 April 2013 increase their lending to businesses if the capital raising is a success. 41. The FCA has ordered Santander to get in touch with 270,000 customers who took out mortgages Financial Times, 2 May 2013 prior to the credit crunch after the lender admitted that it had not been upfront over a change to its 46. As part of efforts to get rid of its image as a pre- mortgage terms. It is anticipated that around eminent tax haven, Luxembourg is prepared to 30,000 former Abbey customers will qualify for share confidential information about the bank compensation although there could be many more. accounts of multinational companies with other Santander has set aside part of a £232m fund for jurisdictions. Currently only individual taxpayers compensation. are covered by information sharing agreements with the EU and US, but Luxembourg's finance Sunday Times, 21 April 2013 minister, Luc Frieden, has said that the country is willing to expand this to include global companies. UBS 42. UBS has revealed a higher than expected increase Financial Times, 30 April 2013 in profits, surprising investors. The turnaround, 47. Chancellor George Osborne has opened a rift with which saw the bank make a profit of SFr1.45 Brussels after he revealed that Britain is to contest billion in the first quarter of 2013, compared to the proposed new European financial transactions losses of SFr1.84 billion in the same period in 2012, was driven by profits from wealth tax at the European Court of Justice. The tax is being pushed for by 11 member states, including management that were stronger than expected and France and Germany. a rise in investment bank profits of 92 per cent.

The Independent, 1 May 2013 Times, 20 April 2013

EUROPEAN GENERAL INTERNATIONAL BANKING 43. Uninsured depositors may be preferred to BANK OF AMERICA bondholders when a bank fails following 48. The bond insurer MBIA will receive $1.7 billion in discussions during an EU finance ministers' a settlement with Bank of America after MBIA meeting in which the German finance minister, had claimed compensation for loans written by the Wolfgang Schaube, proposed that deposits in mortgage lender Countrywide which Bank of Europe should be made safer than bonds. The America purchased in 2008. The deal will allow move is opposed by the UK government. MBIA to remain in business.

Financial Times, 15 May 2013 Financial Times, 7 May 2013

44. The ECB, the Bundesbank, and the FCA were BANK OF CHINA amongst a new group of banks and financial 49. The Foreign Trade Bank of North Korea has had watchdogs that have contacted Bloomberg, the its account closed by the Bank of China following data services business, in relation to claims that the the imposition of sanctions on the Korean bank by company's journalists had accessed their terminals the US, which the US accused of supporting the in an effort to uncover breaking news stories, North Korean programme of nuclear testing. demanding to know if Bloomberg had seen and However, analysts said that this was unlikely to used confidential information. signal a change in the Chinese policy of supporting North Korea to maintain stability in the region. Times, 14 May 2013

45. National Bank of Greece, Alpha Bank and Piraeus Telegraph, 7 May 2013 Bank are planning to raise €21.7 billion of private

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GOLDMAN SACHS resolution passed earlier in 2013 by which China agreed to sanctions against transactions that 50. The High Court has ruled that the tax deal between Goldman Sachs and HMRC was legal. The appeared to contribute to the North Korean nuclear "sweetheart" deal related to a dispute over a tax weapons programme. However, some smaller Chinese banks are still processing transactions to avoidance scheme, now banned, which Goldman's used to pay bonuses to its staff in the UK by way North Korea. of an offshore tax haven. It reached an agreement Financial Times, 14 May 2013 with HMRC to pay only the principal of what it owed - UK Uncut sued the bank saying it should 56. The coming months will see India's third largest have also paid the interest that was due. private sector bank, Axis Bank, open its first branch in China, showing the closer financial links Telegraph, 17 May 2013 between the two largest emerging economies in Asia. India's largest private bank, ICICI, is JP MORGAN expected to also open its first branch in China at 51. There are further demands on Wall Street for some point in 2013. Jamie Dimon's dual role as chairman and chief executive at JP Morgan to be split. The pension Financial Times, 13 May 2013 fund advisory firm Glass Lewis has joined other shareholders in calling for a change in the bank's 57. Eight "cashers" have been charged by prosecutors leadership structure. in the United States for their alleged role in a global cyber-crime ring involving 26 countries, Times, 8 May 2013 which was responsible for losses of $45 million from financial institutions. Criminal charges have 52. JP Morgan's co-chief operating office, Frank been filed against them by the Brooklyn US Bisigano, is to leave the bank to become the chief attorney's office, which has alleged that they executive of First Data Corp. Matt Zames, the withdrew $2.5 million in less than 24 hours from other co-chief at JP Morgan, will assume the role ATMs using stolen prepaid debit card numbers. as sole chief operating officer following Mr Bisgano's departure. Financial Times, 10 May 2013

Times, 29 April 2013 58. US banks and other big mortgage investors have identified and analysed home affordable refinance LAZARDS programme (Harp) loans after they were 53. Larry Slaughter is to become vice-chairman of inadvertently tipped off to more loan data than investment banking at Lazards from 3 June, having intended by Fannie Mae and Freddie Mac. Having resigned from JPMorgan in January. His role at additional information on Harp loans helps identify Lazards will see him continue to have an industrial those loans that could face more obstacles to client focus, specifically large companies in refinancing, making the pinpointing of them Europe. valuable for mortgage investors and traders.

Financial Times, 3 May 2013 Financial Times, 9 May 2013 59. The New York State Department of Financial INTERNATIONAL GENERAL Services has come out as an unlikely supporter of attempts by foreign banks to escape a proposal on 54. The Commodity Futures and Trading Commission capital levels from the US Federal Reserve. The in the US has asked banks and traders on Wall regulator has advised that attempts to tighten Street to prove that 1 million derivatives liquidity and capital requirements should not apply transactions made over the past two years are legal to banks with US assets of less than $50 billion. as part of a clampdown on unregulated trading in swaps contracts. Financial Times, 2 May 2013

Financial Times, 14 May 2013 60. Russia's second biggest state-run bank, VTB, is to receive new investment from sovereign wealth 55. Several large Chinese banks have stopped funds from Qatar, Norway and Azerbaijan. The processing any cross-border cash transfers with investment will come via a $3.3 billion share issue North Korea, a move that goes beyond the UN on the Moscow Stock Exchange, which will reduce

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Russia's stake in the bank to around 61 per cent describe how to generate and read the messages from its current 75 per cent. According to VTB, that form the basis of electronic transactions in the Qatar Holding, Norges Bank Investment financial industry. Management and the State Oil Fund of Azerbaijan have signed up for over half the offering. UK Payments Council, 10 May 2013

Financial Times, 29 April 2013 http://www.paymentscouncil.org.uk/media_centre/ press_releases/-/page/2519/ 61. Michel Barnier, EU Commissioner for financial services, has warned that plans by the US to force 65. Reforming the structure of the EU banking foreign banks to hold more capital, risk "a sector protectionist reaction" and are a threat to peaceful global regulation. The chairman of the Federal The Commission on the Structural Reform of the Reserve, Ben Bernanke, was told by Barnier that Banking Sector has issued a consultation on there could be retaliation against US banks if plans reforming the EU banking sector. It focuses on the to force US subsidiaries of European banks to have key attributes of the structural reform, including higher capital requirements come to fruition. the scope of activities, the strength of separation, and the possible institutional scope. The Financial Times, 23 April 2013 consultation is open until 3 July 2013.

62. Top US regulator Gary Gensler, head of the European Commission Commodity Futures Trading Commission, who is overseeing international efforts to reform global http://ec.europa.eu/internal_market/ financial markets benchmarks, has said that Libor consultations/2013/banking-structural-reform/ is "unsuitable" and should be replaced as soon as docs/consultation-document_en.pdf possible. Whilst Mr Gensler has been openly mistrustful of interbank lending rates since last 66. Bank of England maintains Bank Rate at 0.5% autumn, his latest comments are the strongest and the size of the Asset Purchase Programme indicator yet that the scrapping of the London at £375 billion Interbank Offered rate in its current form, and the The Bank of England's Monetary Policy finding of an alternative, will be sought by Committee has voted to maintain the official Bank regulators. Rate paid on commercial bank reserves at 0.5%. Financial Times, 23 April 2013 The Committee also voted to maintain the stock of asset purchases financed by the issuance of central 63. William Dudley, president of the New York bank reserves at £375 billion. Federal Reserve, has warned that unless there is more international co-operation and sharing of Bank of England, 9 May 2013 inspection data, then the problem of "too big to http://www.bankofengland.co.uk/publications/ fail" banks cannot be solved by regulators. Mr Pages/news/2013/005.aspx Dudley warned that all of the issues where they would need to work together in the face of the 67. Proposal for a Directive of the European collapse of a major international bank have not yet Parliament and of the Council on the been identified by global regulators. comparability of fees related to payment accounts, payment account switching and access Financial Times, 23 April 2013 to payment accounts with basic features

The European Commission has issued a draft PRESS RELEASES Directive which lays down rules concerning the 64. Payments Council plays key role in launch of transparency and comparability of fees charged to revised international financial standard consumers on their payment accounts held within the EU and provided by payment service providers ISO 20022, the global standard that ensures the located in the Union and rules concerning the reliable transfer of financial data, has now had a switching of payment accounts within the Union; 2013 revision published, thanks to UK banking and defines a framework for the rules and industry recommendations led by the Payments conditions according to which Member States shall Council. The series of standards in ISO 20022

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guarantee a right for consumers to open and use first remit. The Financial Services Act 2012, payment accounts with basic features in the Union. which came into effect on 1 April this year, requires the government to provide the FPC with a European Commission 8 May 2013 written remit and recommendations at least once a year. The creation of the FPC as a strong, macro- http://eur-lex.europa.eu/LexUriServ/ prudential authority within the Bank of England LexUriServ.do? addresses a key gap in the previous system of uri=COM:2013:0266:FIN:EN:PDF financial regulation, where no authority had clear responsibility for identifying and addressing 68. LIBOR, public inquiries & FSA disciplinary systemic risks to financial stability. powers - Commons Library Standard Note HM Treasury, 30 April 2013 This Commons Library Standard Note gives a summary of some of the key points relating to the https://www.gov.uk/government/news/ LIBOR scandal. The Note also looks at the now government-provides-financial-policy-committee- enhanced role of the FSA's disciplinary powers with-first-remit with respect to 'benchmark' activities. Three banks have so far been fined in the UK. 71. Bank of England and HM Treasury announce extension to the Funding for Lending Scheme House of Commons, 2 May 2013 The Bank of England and HM Treasury has http://www.parliament.uk/briefing-papers/ announced an extension to the Funding for SN06376.pdf Lending Scheme (FLS). This extension builds on the success of the FLS so far, and has three main 69. The FCA publishes findings of review into objectives: to give banks and building societies interest-only mortgages and reaches agreement confidence that funding for lending to the UK real with lenders to contact interest-only borrowers economy will be available on reasonable terms until January 2015; to increase the incentive for The FCA has published its research into banks to lend to small and medium-sized consumers' ability to repay their interest-only enterprises (SMEs) both this year and next; and to mortgages when they mature. The findings show include lending involving certain non-bank that many people should be in a good position to providers of credit, which play an important role in repay their mortgage when it is due for repayment. providing finance to the real economy. However many borrowers, particularly those whose mortgage is due to be repaid before 2020, Bank of England, 24 April 2013 will need to take control of their mortgage repayment planning now. To that end the FCA, the http://www.hm-treasury.gov.uk/press_43_13.htm Council of Mortgage Lenders and the Building Societies Association are working together to 72. BBA Consumer Panel will deliver real benefits ensure lenders contact their borrowers in order to for bank customers prompt them into checking their plan for repayment is on track and considering the options Banks and consumer groups are to work together available to them. to deliver real change for high street banking customers, the British Bankers' Association has Financial Conduct Authority, 2 May 2013 announced. The BBA is launching a new Consumer Panel chaired by Citizens Advice Chief http://www.fca.org.uk/news/interest-only- Executive Gillian Guy which will meet for the first mortgages time in the coming weeks. The aim is to bring Guidance consultation: http://www.fca.org.uk/ together consumer advocates, leading charities and static/documents/guidance-consultations/gc13- senior bankers to identify areas where banks can 02.pdf improve the service they offer to customers.

70. Government provides Financial Policy British Bankers Association, 24 April 2013 Committee with first remit http://www.bba.org.uk/media/article/bba- The Chancellor of the Exchequer has written to the consumer-panel-will-deliver-real-benefits-for- Governor of the Bank of England to provide the bank-customers new Financial Policy Committee (FPC) with its

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CASE LAW Even if the jurisdiction clause was governed by Mauritian law there was a good arguable case that 73. Validity of asymmetric jurisdiction clause it would be treated as valid and effective notwithstanding the decision in Rothschild. This case concerned the validity of a jurisdiction clause in a facility agreement. Was the jurisdiction clause invalid under English law for being too one-sided? The original facility agreement and associated guarantee were governed by Mauritian law and The borrower and guarantor were wrong in conferred exclusive jurisdiction on the Mauritian construing the jurisdiction clause as conferring a courts. Later however the parties entered into an power on the lender to sue them in any court in amended agreement which provided for English the world but not conferring any rights on them to law as the governing law. The agreement sue in any forum. Under the clause the borrower contained a one way or asymmetrical jurisdiction and guarantor could sue in England, the lender clause which limited the borrower and guarantor merely preserved a right for itself to also be able to bringing proceedings in England but enabled to sue in any court which would regard itself as of the lender to sue in other jurisdictions as well. competent jurisdiction. The clause was not invalid. Such asymmetric provisions have The borrower defaulted on repayment of the loan regularly been enforced by the English courts. and the lender issued proceedings in England. In any event, the validity of the jurisdiction clause The borrower and the guarantor contested was in fact irrelevant as the lender had established jurisdiction, arguing that the English court did not an in personam jurisdiction by serving have jurisdiction because: proceedings on the borrower and guarantor's ■ The jurisdiction agreement remained designated agent in England. The only question subject to Mauritian law and under which arose then was whether the court should Mauritian law the jurisdiction clause was assume and exercise its undoubted jurisdiction. invalid because it was one-sided (following The borrower and guarantor had failed to show the decision of the French Cour de that an alternative forum was more appropriate Cassation in Mrs X v Banque Privée and their application was therefore dismissed. Edmond de Rothschild Europe Mauritius Commercial Bank Limited v (1) Hestia ("Rothschild") (French Supreme Court, Holdings Limited (2) Sujana Universal Industries First Civil Chamber, 26 September 2012, Limited, Commercial Court 24 May 2013 No 11-26.022)); or 74. Nature of guarantee obligations ■ If the jurisdiction clause was governed by English law it was too one-sided to be This case concerned a guarantee given by two compatible with fundamental principles directors of a company ("CTF") to the National regarding equal access to justice. Merchant Buying Society ("Society") which is an industrial and provident society operating for the Was the jurisdiction clause governed by Mauritian benefit of companies in the construction industry. law? The Society is, in effect, a bulk purchaser which The judge could find no authority or principle to enjoys substantial rebates which it passes on to its support the borrower and guarantor's argument members. Members order goods from suppliers that under rules of private international law parties who invoice the Society. The Society pays the can change the governing law of a jurisdiction supplier and then the member pays the Society. agreement by entering into a new agreement but The Society specifies a credit limit for each cannot do so by amending an existing one. member and protects itself with credit insurance In any event, in this case the original facility equal to the member's credit limit. Over the years agreement was replaced by the amended CTF's credit limit reached £200,000. CTF agreement so this was a case of discharge of an encountered difficulties and its account with the old agreement and replacement with a new one. Society fell into arrears. The insurer withdrew its The new agreement was therefore governed by credit protection. The two directors of CTF, M and English law. B, provided the Society with a joint and several guarantee and the insurer re-instated the credit insurance cover.

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CTF's credit limit was later increased to £400,000 the guarantor has assumed?" The answer to this and the insurer increased its cover to £400,000. will depend on the interpretation of the guarantee which will involve considering what "the M resigned as a director and left CTF. Although he document would convey to a reasonable person could have done, he did not revoke the guarantee. having all the background knowledge which would reasonable have been available to the parties in the CTF breached its credit limit. Although the Society situation in which they were at the time of the agreed to increase CTF's credit limit to £700,000, contract" (Investors Compensation Scheme Limited the insurance cover was not increased and the v West Bromwich Building Society [1998] 1 WLR insurer eventually withdrew all cover. CTF went 896). into administration and then liquidation. The balance on its account with the Society was over It might be appropriate to have regard to the £330,000. commercial arrangements in place between the principal and the creditor when interpreting a The issue was whether M was liable under his guarantee but the idea that the interpretation of the guarantee. He argued that he was not as after he guarantee should be conclusively dictated by left CTF there were material variations to the knowledge that the guarantor alone might have had contract between the Society and CTF to which he was wrong. had not consented, including in particular the increase in the credit limit to £700,000. M argued Here, on the face of the document, the guarantee that his guarantee had been given when he knew was a freestanding, "all moneys" guarantee that that CTF's credit limit was £200,000 and that any was not linked to the credit limit to which CTF increase in that limit without his consent was then entitled. There was nothing in the automatically released him from the guarantee. He surrounding circumstances supporting any implied had agreed to the increase to £400,000 but not any limitation. If the parties had intended to limit the further increase. guarantor's liability the guarantee would have said so but it did not. At trial, the court found M liable. This was upheld on appeal. The Court of Appeal identified the key M was liable under the guarantee. issue as being how the guarantee should be interpreted. If it was a guarantee of performance of National Merchant Buying Society v (1) Andrew obligations arising under a "specific contract" that Bellamy (2) Stephen Mallett, Court of Appeal, 2 would be the limit of the guarantee obligations. In May 2013 such a scenario if the parties to the contract varied it then the guarantor would be released because 75. Supreme Court rules on meaning of "cash otherwise the variation would expose him to a flow" and "balance sheet" insolvency tests liability to which he had never agreed. Finance documents often refer to a company In contrast, if the guarantee was given in respect of becoming insolvent within the meaning of s.123 of obligations arising out of a "contemplated course the Insolvency Act 1986 ("Insolvency Act") as an of dealing" rather than a "specific contract", then event of default. In this case the Supreme Court provided that the course of dealing remained considered what it takes for a court to be satisfied within the scope contemplated by the guarantee that a company is "unable to pay its debts" within then any variations in the terms of the contract the meaning of sections 123(1)(e) and 123(2) of between principal and creditor would not affect the the Insolvency Act. continuing liability of the guarantor. The statutory provisions It was wrong to treat a guarantee as being in the "specific contract" class simply if, at the time it S.123(1)(e) is known colloquially as the "cash was given, the relationship between principal and flow" test. It provides that a company is deemed creditor was governed by a contract of which the unable to pay its debts: guarantor knew the terms. That would have the mechanistic effect of turning every guarantee, “if it is proved to the satisfaction of the court that however expressed, into a "specific contract" the company is unable to pay its debts as they fall guarantee. due."

The relevant question in every case should be "what is the nature of the guarantee obligation that

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S.123(2) is known colloquially as the balance sheet If a company's liabilities can be deferred for a test. It provides that a company is deemed unable long period e.g. 30 years and that company is to pay its debts: presently paying its debts as they fall due, a court should proceed with the greatest caution in "…if it is proved to the satisfaction of the court that deciding that the company is balance sheet the value of the company's assets is less than the insolvent under s.123(2). amount of its liabilities, taking into account its contingent and prospective liabilities." BNY Corporate Trustee Services Limited and Others v Neuberger Berman Europe Ltd (on Which test applies when? behalf of Sealink Funding Ltd) and others and BNY Corporate Trustee Services Limited and In deciding which test should apply much will others v Eurosail UK 2007-3BL Plc, Supreme depend on how far into the future you need to Court, 9 May 2013 look.

The court held that the "cash flow" test is not simply concerned with debts that are immediately due and payable but also with debts falling due in the reasonably near future. What the "reasonably near future" means will depend on all the circumstances of the case but especially the nature This bulletin is intended as a general overview and of the company's business. discussion of the subjects dealt with. It is not intended, and should not be used, as a substitute for taking legal Once the court has to move beyond the advice in any specific situation. DLA Piper UK LLP will "reasonably near future" however, then any accept no responsibility for any actions taken or not attempt to apply the "cash flow" test becomes taken on the basis of this publication. If you would like completely speculative. At that point the only further advice, please contact: sensible test to apply is the balance sheet test which compares present assets with present and Leeds: Hugh Evans future liabilities (discounted for contingencies and T 0113 369 2200 deferment). E [email protected] The balance sheet test is very far from an exact test and the burden of proving it lies with the party London: Jean-Pierre Douglas-Henry asserting balance-sheet insolvency. T 020 7153 7373 The Court of Appeal had described the test of E [email protected] balance sheet insolvency as being as assessment of whether the company had reached "the point of no return" but this was not appropriate. The court Manchester: Stewart Plant must assess whether the company can reasonably T 0161 235 4544 be expected to meet all its liabilities, looking at the company's assets and making proper E [email protected] allowance for the nature of prospective and contingent liabilities.

Whether the balance sheet test of insolvency is satisfied will depend on the available evidence as to the circumstances of the particular case. When looking far into the future there may be many imponderables which might affect the company's ability to meet liabilities when they fall due e.g. currency movements, interest rate fluctuations, the state of the economy or the housing market etc. The more distant the liabilities are, the harder it becomes to make predictions and the harder it will be to satisfy a court that a company is balance sheet insolvent.

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This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not be used as, a substitute for taking legal advice in any specific situation. DLA Piper UK LLP and DLA Piper SCOTLAND LLP will accept no responsibility for any actions taken or not taken on the basis of this publication. If you would like further advice, please speak to [ ] [your DLA Piper contact] on 08700 111 111.

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